Just hours after the speech, Israeli tanks swept
into the West Bank city of Hebron sparking clashes with Palestinian gunmen.

Israeli offensive

Palestinian security officials reported that two Palestinians had been killed during exchanges of fire in the city.

Hebron is the seventh West Bank town the Israeli army has moved into as part of an offensive it says is aimed at curbing suicide bombings.

Palestinian leaders don't drop from parachutes from Washington or anywhere else. Palestinian leaders are chosen by the Palestinian people

Saeb Erekat, Palestinian minister

During his speech, Mr Bush said peace required a "new and different Palestinian leadership" which could lead the Palestinians to their own state.

"If Palestinians embrace democracy, confront corruption, and firmly reject terror, they can count on America's support for creation of a provisional state of Palestine," he said.

But Mr Bush said US support for provisional Palestinian statehood would only come after the Palestinians elected new leaders, built new institutions and new security arrangements to protect Israel from terrorist attacks.

Opposing views

The future borders of the Palestinian entity and "certain aspects of its sovereignty" would be provisional until resolved as part of a final settlement in the Middle East.

Palestinian Cabinet Minister Saeb Erekat said the call for a new leadership was "not acceptable", while Palestinian Cabinet Secretary Ahmed Abdel Rahman said that Mr Bush had "mixed up" the concepts of terrorism and resistance to Israeli occupation.

Mr Erekat insisted that Mr Arafat was the Palestinians' "directly elected leader in free and fair elections... and President Bush must respect the choice of the Palestinian people".

Upsurge in violence

"When they chose Arafat, they chose a strategy of terror, and they chose to continue sending suicide and homicide bombers to Israel," Raanan Gissin, a spokesman for the Israeli prime minister said.

Mr Bush's announcement comes a week after two devastating Palestinian suicide attacks on Israel, which delayed the speech.

It also comes against the backdrop of major Israeli incursions into Palestinian-controlled land.

Mr Bush made it clear that he believed the Palestinian leader and his administration to be entirely responsible for the current bloodshed.

Officials in Washington said that, if Mr Bush's conditions were met, a provisional Palestinian state could be established in 18 months and then made permanent in about three years as part of a final Middle East settlement.